Interpreting Bankruptcy Code §§502 and 506: Post-Petition Attorneys’ Fees in a Post-Travelers World
by: Prof. Mark S. Scarberry
Pepperdine University School of Law; Malibu, Calif.
ABI Robert M. Zinman Resident Scholar; Alexandria, Va.
Editor’s Note: The following is an abstract of an article forthcoming in the Winter issue of theABI Law Review.
Under the Bankruptcy Code, the filing of a bankruptcy petition creates a gulf
between the pre-petition and post-petition worlds. The allowable amount of a
claim in bankruptcy is determined as of the petition date. Interest stops
accruing on claims (other than over-secured claims) as of the petition date;
post-petition interest is not an allowable part of an unsecured claim. It would
seem that post-petition attorneys’ fees similarly would not be an allowable
part of an unsecured claim, even if the claim arises under a contract or
statute that calls for the creditor’s attorneys’ fees to be added to the debt.
The right to fees (pre- and post-petition) under a contract or statute with
respect to a pre-petition debt is itself a pre-petition claim that typically
will be discharged, regardless of whether the fees that are allowed in the
bankruptcy case include post-petition fees. Because the right is a pre-petition
claim, there is an argument (with its genesis in the 1982 United Merchants
decision of the Second Circuit applying pre-Code law) that post-petition fees
are allowable as pre-petition contingent claims, either in an estimated amount
or in an amount established after the fees are incurred. The majority of courts
(where the debtor is insolvent) have rejected the Second Circuit’s argument and
thus held that post-petition fees are not allowable with respect to
pre-petition unsecured claims. The article provides an argument from the text
of Bankruptcy Code §§502(b), 506(a) and 506(b) in support of the majority view,
a textual argument that the article concludes is determinative.
In its unanimous 2007 Travelers opinion, the Supreme Court refused to
decide whether post-petition fees are allowable on unsecured claims, deciding
instead only that the Ninth Circuit’s Fobian Rule—a federal common law rule
precluding award or allowance of post-petition fees for litigation of
bankruptcy law issues—had no basis in the text of the Bankruptcy Code and could
not stand. The article analyzes Travelers, concludes that the Court left
open for consideration all grounds other than the Fobian Rule for deciding the
allowability of post-petition fees, and provides a brief eulogy for the Fobian Rule.
The article describes and critiques the conventional arguments for the majority
view. It also explains that some courts—including courts of appeals in at least
three circuits—have embraced a misunderstanding of §506(b). They have done so
in part to resolve a quandary created by their adoption, in limited
circumstances, of the minority view, and in part to allow for a review under
federal common law standards of the reasonableness of pre-petition fees
incurred by over-secured creditors, a federal common law approach reminiscent
of the ill-fated Fobian Rule.
The article then argues, as noted above, that the text of §§502(b), 506(a) and
506(b)—in fact, the plain meaning of those sections—precludes allowance of
post-petition fees on unsecured claims. Thus, the majority view is correct. The
article goes on to consider five potential problems with the majority view,
concluding that none of them casts serious doubt on its correctness. (1) The
majority view does not render §502(b)(2) superfluous. (2) There is no
conflicting plain-meaning interpretation of the provisions of the Code dealing
with contingent claims. If there were, it would have to yield to the more
specific provisions of §§502(b), 506(a) and 506(b) (and if there were a need
for harmonization, the policies of the Code cut in favor of the majority view).
(3) Any potential unfairness of denial of post-petition fees in indemnity
situations may be substantially mitigated if post-petition “collateral legal
expenses” are allowable, a possibility noted below. (4) The apparent unanimity
of courts in requiring payment of post-petition fees where the debtor is
solvent may not conflict with the textual analysis that is at the base of the
majority rule, because specific provisions of the Code may call for payment of
post-petition fees where the debtor is solvent, even if the fees are not part
of an allowed claim. (5) The majority view does not conflict with pre-Code law
as Congress would have understood it at the time of enactment of the Code.
Finally, the article describes issues that require further consideration.
First, further analysis is needed to determine whether payment of post-petition
fees is required by provisions of the Code where the debtor is solvent; to the
extent the answer is “no,” the courts will need to be reminded to follow the
text of the Code (or perhaps the correctness of the majority view may need to
be reconsidered). Second, further analysis is needed of the concept of a
contingent claim and of whether a claim for post-petition fees should be
considered contingent as the Code uses that term. Third, further
consideration is needed of the relationship between §506(b) and “collateral
legal expenses.” It is likely that collateral legal expenses—even to the extent
that they consist of attorneys’ fees—are not the kind of fees, costs or charges
referenced in §506(b). If further analysis confirms that conclusion, then
allowance of post-petition collateral legal expenses as contingent claims would
not conflict with the text of §§502(b), 506(a) and 506(b). Fourth, the Fobian Rule dealt not just with whether post-petition fees could be included in
allowed claims, but also with imposition of personal liability for fees
incurred in litigating bankruptcy law issues (such as an award of fees against
a debtor who unsuccessfully opposes a nondischargeability action brought by a
contract creditor whose contract includes a broad attorneys’ fee clause). With
the Fobian Rule abrogated, such fees may be awarded unless another basis is
found for precluding an award, such as preemption by the provisions of §523(d).
By granting certiorari in the DeRoche case, vacating the Ninth
Circuit’s decision and remanding for further consideration in light of Travelers,
the Supreme Court has teed up that issue.